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1. CABLE MODEM LITIGATION CONTINUES

On August 27, 2004, the FCC filed a petition for certiorari in Brand X Internet Services v. FCC, 345 F.3d 1120 (9^th Cir. 2004). This case began in the spring of 2002 when the FCC declared that cable modem service should be classified as an “information service.” Numerous parties filed suit challenging the FCC’s declaratory ruling. The Ninth Circuit eventually heard the challenge and in October 2003 held that cable modem service should be classified as both an information service and a telecommunications service.

When the FCC originally issued its declaratory ruling cable operators around the country ceased providing franchise fee payments on cable modem revenue under local cable franchises. The Ninth Circuit’s decision offered no relief to the franchising authorities which had argued that cable modem service should be classified as a “cable service” under federal law. The question presented for the Supreme Court is whether the Court of Appeals erred in holding that the FCC had impermissibly concluded that cable modem service is an information service, without a separately regulated telecommunications service component, under the Communications Act of 1934.

The FCC argues that the court should defer to the FCC’s expertise in reaching its conclusion that cable modem service should be classified as an information service. Responses to the petitions for cert are due September 30, 2004.

If the cable industry does not prevail and the Ninth Circuit’s decision is upheld it is possible that cable operators could be required to open up access to their broadband pipes to competing ISPs. In essence, cable operators would be subject to the FCC’s telecommunications regulations (i.e. common carrier regulations) which may require that operators offer their networks to competing providers on the same terms and conditions as they offer themselves. Moreover, franchising authorities may be able to impose right-of-way obligations on cable operators in the same manner as such regulations are applied to telecommunications providers.

2. CHARTER TO REIMBURSE CUSTOMERS FOR CONVERTER AND WIRING FEES

Charter Communications recently settled litigation related to wire maintenance fees and charges for unneeded converters. The class action lawsuit alleged that Charter 1) assessed wire maintenance fees without informing customers that the associated wire maintenance plans were not mandatory, and 2) required the use and payment of set-top converters that were not needed. The settlement requires Charter to offer customers around the country free service upgrades, premium services and/or high-speed Internet connections. The total costs associated with the settlement could be as high as $200,000,000 depending upon the selections made by customers. Local franchising authorities should review notices being sent by Charter to subscribers to ensure the options are properly communicated and subscribers are informed of the benefits available to them.

Charter has also recently settled other matters including litigation involving violations of security laws and class action litigation in California regarding late fee payments.

3. ADELPHIA’S SYSTEMS CLOSER TO SALE

Adelphia Communications Corporation, the fifth largest cable television company in the country serving customers in 30 states, has announced plans for the consideration of selling its cable systems. The company has received approval from the bankruptcy court to retain investment bankers to manage the sale process which Adelphia hopes to complete as soon as year end. Adelphia has divided its cable assets into clusters configured as follows:

1. Northern New England/Eastern New York

2. Cleveland/Greater Ohio Valley

3. Florida/Southeast

4. California/Western

5. Virginia/Maryland/Colorado Springs/Kentucky

6. Pennsylvania

7. Western New York

8. Connecticut

Prospective buyers are permitted to bid on one or more clusters or may make an offer to purchase the entire company.

Cities served by Adelphia should begin considering issues related to a transfer of control of the cable system. Reviewing the franchise to identify any issues of noncompliance or matters in dispute should be a priority at this time. Systems in the midst of franchise renewal proceedings with Adelphia should also carefully consider the impact of the impending sale on any new franchise agreement or current renewal negotiations.

4. FCC CONSIDERING A LA CARTE CABLE TELEVISION

On May 25, 2004, the FCC issued a public notice seeking comment on a la carte programming and pricing options for programming distribution on cable television and direct broadcast satellite systems. The FCC proceeding was in response to a letter received by the FCC on May 18, 2004 from Congressman Barton, Dingell, Upton, Markey and Deal all of which are members on the Committee on Energy and Commerce. In addition, Senator John McCann, Chairman of the Committee on Commerce, Science and Transportation sent a letter to the FCC dated May 19, 2004 regarding a la carte programming.

Most cable operators and satellite providers require subscribers to select packages of programming despite the fact that subscribers may only regularly view about 10 channels offered by the provider. The cable industry generally argues that offering packages of cable channels allows diversity in programming content and economies of scale in providing such programming to consumers. Consumer groups argue that subscribers should have the right to pick and choose the channels that they desire to view and should not be forced to pay for channels which may contain content that the subscriber may deem offensive.

Local regulators have generally argued in favor of a la carte programming although NATOA, a national association representing franchising authorities, recently studied the matter and issued the following position statement: “NATOA supports a federal policy which enables consumers to choose video services that meet their individual needs with regards to a multitude of diverse programming and content, at prices one would experience in a truly competitive market between a variety of both wireline and wireless providers.”

NATOA argues that encouraging a multitude of providers in all markets for video services will in the long term lead to consumer choice with respect to content and pricing schemes. The National Cable Television Association which represents the largest cable companies such as Comcast and Time Warner has argued that a la carte pricing would be harmful to cable networks and consumers and would ultimately reduce programming diversity driving up the cost of cable and satellite television. However, the American Cable Association which represents smaller cable operators has endorsed a la carte pricing.

The FCC’s public notice solicits comments on a number of issues including how a la carte packaging would affect advertising supported networks, the financial impact on subscribers’ bills, the potential of reducing diversity in programming content, the impact on rural and smaller markets, whether additional set-top equipment would be required to facilitate a la carte programming and a variety of other legal and regulatory issues.

Congress has so far been reluctant to mandate a la carte programming although pressure from consumer groups is mounting. The FCC’s findings from its public notice together with recent studies conducted by the general accounting office will likely be debated in the coming year to determine if a la carte programming and pricing options should be mandated.

5. LIQUIDATED DAMAGES UPHELD FOR BREACH OF FRANCHISE

On May 7, 2004, Newton Township, Pennsylvania (population approximately 3,000) prevailed in litigation against RCN Telecommunications Services of Philadelphia, Inc. (RCN). RCN Telecom Services of Philadelphia, Inc. v. Newton Township, Bucks County, Pennsylvania, No. 1720-C.D.-2003 (Pa. Commw. May 7, 2004). The case stems from a franchise which the township awarded to RCN which required RCN to complete construction of a system and construct and activate an institutional network linking six locations in the township within four years.

In 2001, RCN told the township that it had no plans to begin construction for the foreseeable future and the township issued a notice of default. The franchise contained a liquidated damages provision whereby the township and RCN had agreed to liquidated damages in the amount of $500 per day for material violations of the franchise, including failure to complete construction of the cable system. The township calculated RCN’s liquidated damages for failure to construct and activate a cable system at just over $1 million with an additional $1 million in liquidated damages for failure to complete the institutional network.

RCN appealed the township’s findings and a trial court concluded that the $2 million in liquidated damages were not a “penalty” and accordingly affirmed the township board’s decision. RCN appealed and the appellate court issued a number of interesting findings.

The court held that despite the fact that RCN had submitted an application for modification of the franchise the Cable Act did not provide for an automatic stay based upon the mere submission of a modification application.

The court also held that “parties to a contract may include a liquidated damages provision which ensures recovery in cases where the computation of actual damages would be speculative. Such clauses are enforceable provided that, at the time the parties enter into the contract, the sum agreed to constitutes a reasonable approximation of the expected loss rather than [SIC] an unlawful penalty.”

In determining whether a damages stipulation is an unenforceable penalty or a valid liquidated damages provision the court considered the “relation which the sum stipulated bears to the extent of the injury which may be caused by the several breaches provided against the ease or difficulty of measuring a breach in damages,” and other matters inherent in the transaction.

The case is an important victory for municipalities and provides clarification that liquidated damages can be an effective enforcement tool in cable television franchises.

6. BROADBAND ACCESS IS INCREASING

The FCC recently released statistics detailing increases in broadband access in the United States. According to the FCC, subscribership to broadband services (200 KBPS in both directions) has increased from about 6 million lines in 2001 to over 20 million lines at the end of 2003. Moreover, access to such broadband capability has also increased with just over 80% of all zip codes having access to such lines in June of 2001 to over 93% of the zip codes in the United States have access to high-speed lines at the end of 2003. Another interesting statistic cited by the FCC is that the percentage of zip codes reporting four or more providers of high-speed lines has increased to 46.3% at the end of 2003. Cable modem service continues to dominate provision of advanced services, with cable representing 75.3%, DSL representing 14.9% and other technologies representing 9.8%.

7. IP ENABLED SERVICES DOMINATE NATOA’S ANNUAL CONFERENCE

In mid September 2004, NATOA held its annual conference for municipal regulators and Internet Protocol (IP) enabled services were the focus of numerous presentations. Industry experts indicated that Voice-over-Internet-Protocol has already taken hold and will soon become the dominate technology for placing traditional telephone calls in the country. This same technology will also soon be used to deliver TV and video to consumers’ homes. In fact, in a press release dated September 15, 2004 FCC chairman, Michael Powell, stated that “IP TV and video are going to start coming on very, very strong. The number one thing being worked on in small companies and in labs…[is] IP TV--the ability to put together integrated products that use a broadband connection as the infrastructure source for video content.”

The question for local regulators will be how IP enabled services fit into the present regulatory structure at the local level. Will IP TV and video be governed by a traditional cable television franchise? Will cities continue to have the right to mandate local PEG access channels to communicate information to city residents? Will cities be permitted to maintain oversight of public rights-of-way and address customer service issues on behalf of constituents? These and many other questions were raised at the conference although the answers will likely have to wait for the conclusion of pending FCC proceedings, the Brand X case before the U.S. Supreme Court and proposed congressional legislation.